[Table_yemei1] Investment Focus [Table_yejiao1] This research report is distributed by Haitong International, a global brand name for the equity research teams of Haitong International Research Limited (“HTIRL”), Haitong Securities India Private Limited (“HSIPL”), Haitong International (Japan) K.K. (“HTIJKK”), Haitong International Securities Company Limited (“HTISCL”), and any other members within the Haitong International Securities Group of Companies (“HTISG”), each authorized to engage in securities activities in its respective jurisdiction. Please refer to the appendix for the Analyst Certification, Important Disclosures and Important Disclaimer. [Table_Main] Research Report 7 Aug 2021 Prince Pipes & Fittings Ltd (PRINCPIP IN) Weak Q1FY22; Maintain NEUTRAL on Tepid Earning Growth Profile as Stock is Fully Valued [Table_Info] Maintain NEUTRAL Rating NEUTRAL Current Price Rs665.05 Target Price Rs600.00 Market cap Rs73.17bn / US$0.99bn Daily traded value (3mth) US$0.70mn Shares in issue 110.03mn Free float (%) 25% 1 yr high - low Rs740.25-Rs116.45 Note: Current Price Rs665.05 is the close price on 6 Aug 2021 Source: Factset 1mth 3mth 12mth Absolute -8.6% 16.1% 474.4% Absolute USD -8.5% 15.7% 480.3% Relative to Nifty100 -11.6% 2.6% 398.7% [Table_Profit] (Rs mn) Mar-21A Mar-22E Mar-23E Mar-24E Revenue 20,715 23,736 26,165 28,782 （+/-） 27% 15% 10% 10% Net profit 2,218 2,088 2,201 2,372 （+/-） 89% -6% 5% 8% Diluted EPS (Rs) 20.16 18.98 20.00 21.56 GPM 33.4% 30.7% 30.7% 30.7% ROE 23.6% 18.5% 16.9% 16.0% P/E 21 35 33 31 Source: Company data, HTI estimates Prince Pipes & Fittings (PRINCPIP) topline came below our estimate (-9.4%) mainly due to sharper-than-expected decline in sales volume (-25.5% YoY vs -15.3% HTIe), but EBITDA was broadly in line with our estimate (+1.6%) mainly due to lower employee expense (-22% QoQ). The key result highlight is a) PRINCPIP reported sharp decline in sales volume on sequential basis in comparison to its major peers in Q1FY22 (Finolex (FNXP): -7.3%; SI: -36.7%; ASTRA: -42.1%; PRINCPIP: -55.7%); b) pipe EBITDA per unit fell at a higher pace on sequential basis than its peers (ASTRA: -16.4%; SI: -27.6%; FNXP: -28.9%; PRINCPIP: -36.6%); and c) net cash position fell from Rs1.45 bn in Mar’21 to net debt of Rs0.4 bn in Jun’21 mainly due to sharp increase in working capital. The only positive point we noted in the result is that PRINCPIP EBITDA per unit came at Rs22.3/kg in Q1FY22 (which is well above historical run rate of Rs16-17/kg) even during declining PVC resin price environment and negative operating leverage playing out during the quarter. We maintain our ‘NEUTRAL’ rating on the stock as we expect a) EBITDA to grow at a tepid 4.4% CAGR over FY21-FY24 even after considering aggressive assumptions (volume to grow at 12% CAGR over FY21-FY24 versus 8.0% clocked over FY18-FY21 and average EBITDA per unit projected at Rs22.2/kg over FY22-FY24 versus 3-year average of Rs15.6/kg clocked over FY18-FY20); and b) the stock appears to be fully valued (as it trades at 34.4x on 1-year forward P/E basis, which is at a slight premium to 32.3x multiple currently for the industry leader i.e. Supreme Industries (SI)) on our estimates. We raise our TP by 12.1% to Rs600 per share mainly due to revision in our P/E multiple from 27x to 30x on our revised FY23 EPS estimate. Weak Q1FY22 on lower sales volume and MTM inventory loss PRINCPIP Revenue/EBITDA/PAT grew by 9.3%/30.5%/57.8% YoY in Q1FY22 over weak base of last year. However, PRINCPIP sales volume on 2-year CAGR basis de-grew by 26.3% in Q1FY22 to spread of second COVID wave in both urban and rural areas, weak agri pipe demand and high channel inventory towards end of Mar’21. Pipe EBITDA per unit also fell sharply by 36.6% QoQ to Rs22.3/kg in Q1FY22 due to MTM loss of Rs50 mn (vs MTM gain of Rs320-350 mn booked in Q4FY21) and negative operating leverage. Going ahead, management indicated of a healthy pick up in pipe demand and expects to operate at EBITDA margin of 13-15% on a sustainable basis. Maintain NEUTRAL; Raise TP by 12.1% to Rs600 per share We maintain our NEUTRAL rating on the stock and raise our TP to Rs600 (previously Rs535) due to revision in our P/E multiple from 27x to 30x on our revised FY23 EPS estimate. We attribute the raise in our target multiple to the company’s improving return profile. At CMP, the stock trades at 34.4x on 1-year forward P/E versus 32.3x multiple for the industry leader i.e. SI on our estimates. Increase in exposure to group companies, loss of market share and sharp decline in PVC resin prices are the key downside risks to our call. Sharp-than-expected recovery in demand is the upside risk to our call. [Table_Author] Utkarsh Nopany Sohil Kaura [email protected][email protected]90 225 360 495 630 Price Return Nifty100 Aug-20 Dec-20 Apr-21 Aug-21 Volume
Transcript
[Table_yemei1] Investment Focus
[Table_yejiao1] This research report is distributed by Haitong International, a global brand name for the equity research teams of Haitong International Research Limited (“HTIRL”), Haitong Securities India Private Limited (“HSIPL”), Haitong International (Japan) K.K. (“HTIJKK”), Haitong International Securities Company Limited (“HTISCL”), and any other members within the Haitong International Securities Group of Companies (“HTISG”), each authorized to engage in securities activities in its respective jurisdiction. Please refer to the appendix for the Analyst Certification, Important Disclosures and Important Disclaimer.
[Table_Main] Research Report
7 Aug 2021
Prince Pipes & Fittings Ltd (PRINCPIP IN) Weak Q1FY22; Maintain NEUTRAL on Tepid Earning Growth Profile as Stock is Fully Valued
[Table_Info] Maintain NEUTRAL Rating NEUTRAL
Current Price Rs665.05
Target Price Rs600.00
Market cap Rs73.17bn / US$0.99bn
Daily traded value (3mth) US$0.70mn
Shares in issue 110.03mn
Free float (%) 25%
1 yr high - low Rs740.25-Rs116.45
Note: Current Price Rs665.05 is the close price on 6 Aug 2021
Prince Pipes & Fittings (PRINCPIP) topline came below our estimate (-9.4%) mainly due to sharper-than-expected decline in sales volume (-25.5% YoY vs -15.3% HTIe), but EBITDA was broadly in line with our estimate (+1.6%) mainly due to lower employee expense (-22% QoQ). The key result highlight is a) PRINCPIP reported sharp decline in sales volume on sequential basis in comparison to its major peers in Q1FY22 (Finolex (FNXP): -7.3%; SI: -36.7%; ASTRA: -42.1%; PRINCPIP: -55.7%); b) pipe EBITDA per unit fell at a higher pace on sequential basis than its peers (ASTRA: -16.4%; SI: -27.6%; FNXP: -28.9%; PRINCPIP: -36.6%); and c) net cash position fell from Rs1.45 bn in Mar’21 to net debt of Rs0.4 bn in Jun’21 mainly due to sharp increase in working capital. The only positive point we noted in the result is that PRINCPIP EBITDA per unit came at Rs22.3/kg in Q1FY22 (which is well above historical run rate of Rs16-17/kg) even during declining PVC resin price environment and negative operating leverage playing out during the quarter. We maintain our ‘NEUTRAL’ rating on the stock as we expect a) EBITDA to grow at a tepid 4.4% CAGR over FY21-FY24 even after considering aggressive assumptions (volume to grow at 12% CAGR over FY21-FY24 versus 8.0% clocked over FY18-FY21 and average EBITDA per unit projected at Rs22.2/kg over FY22-FY24 versus 3-year average of Rs15.6/kg clocked over FY18-FY20); and b) the stock appears to be fully valued (as it trades at 34.4x on 1-year forward P/E basis, which is at a slight premium to 32.3x multiple currently for the industry leader i.e. Supreme Industries (SI)) on our estimates. We raise our TP by 12.1% to Rs600 per share mainly due to revision in our P/E multiple from 27x to 30x on our revised FY23 EPS estimate. Weak Q1FY22 on lower sales volume and MTM inventory loss PRINCPIP Revenue/EBITDA/PAT grew by 9.3%/30.5%/57.8% YoY in Q1FY22 over weak base of last year. However, PRINCPIP sales volume on 2-year CAGR basis de-grew by 26.3% in Q1FY22 to spread of second COVID wave in both urban and rural areas, weak agri pipe demand and high channel inventory towards end of Mar’21. Pipe EBITDA per unit also fell sharply by 36.6% QoQ to Rs22.3/kg in Q1FY22 due to MTM loss of Rs50 mn (vs MTM gain of Rs320-350 mn booked in Q4FY21) and negative operating leverage. Going ahead, management indicated of a healthy pick up in pipe demand and expects to operate at EBITDA margin of 13-15% on a sustainable basis. Maintain NEUTRAL; Raise TP by 12.1% to Rs600 per share We maintain our NEUTRAL rating on the stock and raise our TP to Rs600 (previously Rs535) due to revision in our P/E multiple from 27x to 30x on our revised FY23 EPS estimate. We attribute the raise in our target multiple to the company’s improving return profile. At CMP, the stock trades at 34.4x on 1-year forward P/E versus 32.3x multiple for the industry leader i.e. SI on our estimates. Increase in exposure to group companies, loss of market share and sharp decline in PVC resin prices are the key downside risks to our call. Sharp-than-expected recovery in demand is the upside risk to our call.
[Table_header1] Prince Pipes & Fittings Ltd (PRINCPIP IN) MAINTAIN NEUTRAL
Key takeaways from Q1FY22 Conference Call
Demand scenario: The demand got impacted in Q1FY22 due to spread of second COVID wave in both urban and rural areas, weak agri pipe demand and high channel inventory towards end of Mar’21. However, the company has observed improvement in demand condition in the month of Jul’21 over Jun’21 (which was also better than May’21) due to low channel inventory towards end of Q1FY22 and pick-up in plumbing pipe demand due to recovery in real estate sector. Going ahead, the management is optimistic of good pick up in pipe demand, but has refrained from providing any volume growth guidance.
PVC resin price outlook: PVC resin prices are expected to remain firm due to rising demand and tight global supplies.
Product-mix: Plumbing pipe revenue share was 65%, followed by agri (at 30%) and infra (5%). In terms of polymer, PVC share in pipe revenue is 65-70%, followed by CPVC (18-20%) and others (10%).
New product launches: PRINCEPIP has launched CPVC piping systems for industrial applications, whose market size is estimated at Rs160 bn. Currently, pipes for industrial application is mainly dominated by MS pipes and there is a low penetration of plastic pipe segment for industrial applications. However, the management don’t expect substantial revenue contribution from this segment, but the product gross margin profile is superior to its existing product profile.
Water tanks and valves: The company has received encouraging feedback for these products, but does not expect it to be a major driver of growth atleast for the medium-term.
Tie-up with Ultratech for network expansion: PRINCPIP entered into association with Ultratech Building Solution (UBS) to leverage UBS dealer network (~2000 dealers) to enhance its “Prince” brand visibility in the semi-urban and rural areas.
Nal Se Jal: Observed good demand from this program in H2FY21, but it was tepid in Q1FY22. PRINCPIP plans to participate in this program even though it has a low gross margin profile due to large volumes and receivable cycle remains disciplined.
CPVC pipe: The company expect double-digit growth in CPVC pipe segment.
Margin outlook: Expects EBITDA margin to be in the range of 13-15% in future.
MTM inventory loss: Booked MTM inventory loss of Rs50 mn in Q1FY22. Going ahead, the management does not expect any further MTM inventory loss in anticipation of PVC resin prices to remain tight in near-future.
Ad & brand spend: Plans to spend 2-3% of topline on ad & brand spend in future
Channel Finance: Plans to keep 18-20% of its distributor with good long credit track record under its existing channel finance facility.
7 Aug 2021 3
[Table_header1] Prince Pipes & Fittings Ltd (PRINCPIP IN) MAINTAIN NEUTRAL
Quarterly Financial Snapshot (Rs mn)
Particulars Q1FY22 Q1FY21 % chg Q4FY21 % chg
Operating income 3306 3025 9.3% 7614 -56.6%
Raw-Material expense 2321 2196 5.7% 4961 -53.2%
Gross Profit 985 829 18.9% 2653 -62.9%
Employee expense 214 222 -3.4% 275 -22.1%
Other expense 358 291 23.2% 910 -60.6%
EBITDA 413 316 30.5% 1468 -71.9%
D&A 159 140 13.7% 151 5.5%
EBIT 253 176 43.9% 1317 -80.8%
Interest cost 27 68 -60.3% 50 -45.5%
Other income 22 52 -57.8% 45 -51.0%
PBT 248 160 55.2% 1312 -81.1%
Tax 71 47 49.1% 340 -79.2%
Reported PAT 178 113 57.8% 972 -81.7%
As % of net revenues Q1FY22 Q1FY21 chg (bps) Q4FY21 chg (bps)
Gross margin 29.8 27.4 240 34.8 -505
Employee cost 6.5 7.3 -86 3.6 287
Other cost 10.8 9.6 123 12.0 -111
EBITDA margin 12.5 10.5 203 19.3 -680
Tax rate 28.5 29.7 -117 25.9 257
APAT margin 5.4 3.7 165 12.8 -740
Source: Company data, HTI
Key Operating Metrics
Particulars Q1FY22 Q1FY21 % chg Q4FY21 % chg
Sales Volumes (KTPA) 18.5 24.8 -25.5% 41.6 -55.7%
Realization (Rs/kg) 179 122 46.7% 183 -2.1%
EBITDA per unit (Rs/kg) 22.3 12.8 75.2% 35.3 -36.6%
Sharp sequential contraction in EBITDA margin in Q1FY22 is mainly due to MTM inventory loss in the current quarter versus gain booked in previous quarter and negative operating leverage
Sharp increase in operating cycle in Q1FY22 is mainly due to high channel inventory towards end of Mar’21 and second COVID wave. The company expect its operating cycle to come back to normal level shortly.
Earnings estimates slightly tweaked to account for Q1FY22 result and firm global PVC resin price outlook
7 Aug 2021 4
[Table_header1] Prince Pipes & Fittings Ltd (PRINCPIP IN) MAINTAIN NEUTRAL
PRINCPIP volume de-grew at a higher pace than its major peers in Q1FY22 over Q4FY21
PRINCPIP EBITDA per unit also fell at a sharper pace than its peers in Q1FY22 over Q4FY21
Source: Company data, HTI Source: Company data, HTI
However, PRINCPIP EBITDA per unit still remains well above normal run rate in Q1FY22
PRINCPIP had a net debt of Rs0.42 bn in Jun’21 vs net cash of Rs1.45 bn in Mar’21 due to temporary sharp increase in inventory and debtor period
Source: Company data, HTI Source: Company data, HTI
We maintain Neutral rating as PRINCPIP EBITDA to grow at tepid 4.4% CAGR over FY21-FY24,..
..despite volume projected to grow at 12% CAGR over FY21-FY24 vs 8% CAGR over FY18-FY20..
Source: Company data, HTI estimates Source: Company data, HTI estimates
-7.3%
-36.7%
-42.1%
-55.7%-60%
-50%
-40%
-30%
-20%
-10%
0%
FNXP SI ASTRA PRINCPIP
Volume Growth % (QoQ) - Q1FY22
-16.4%
-27.6% -28.9%
-36.6%-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
ASTRA(Pipe)
SI (Pipe) FNXP(Pipe)
PRINCPIP
Growth in EBITDA per unit (QoQ) -Q1FY22
-25%
0%
25%
50%
75%
100%
125%
10
15
20
25
30
35
40
Q1
FY2
0
Q2
FY2
0
Q3
FY2
0
Q4
FY2
0
Q1
FY2
1
Q2
FY2
1
Q3
FY2
1
Q4
FY2
1
Q1
FY2
2
PRINCPIP EBITDA per unit (Rs/kg)
% change (YoY)
0
20
40
60
80
100
120
140
Inventory days Debtor days
-10%
0%
10%
20%
30%
40%
50%
60%
10
15
20
25
30
35
40
45
FY19 FY20 FY21 FY22EFY23EFY24E
EBITDA (Rs bn) Growth (YoY)
0%
5%
10%
15%
20%
25%
FY19 FY20 FY21 FY22E FY23E FY24E
Volume growth (YoY)
7 Aug 2021 5
[Table_header1] Prince Pipes & Fittings Ltd (PRINCPIP IN) MAINTAIN NEUTRAL
..and EBITDA per unit also projected at an average Rs22.2/kg over FY22-FY24 vs 3-year average of Rs15.6/kg over FY19-FY21
PRINCPIP stock got re-rated in the recent past on market share gain with improving margin profile and better corporate governance practices
Source: Company data, HTI estimates Source: Company data, HTI estimates
PRINCPIP pre-tax ROIC sharply improved from 25.5% in FY20 to 36.6% in FY21, but it is still below its major peers
PRINCPIP stock appears to be fully valued as it now trades at 34.4x on 1-year forward P/E vs 32.3x enjoyed by industry leader (i.e. SI)
Source: Company data, HTI estimates Source: Company data, HTI estimates
10
15
20
25
30
10
15
20
25
30
FY19 FY20 FY21 FY22E FY23E FY24E
EBITDA per kg 3-year average
0
5
10
15
20
25
30
35
40
PRINCPIP 1yr fwd PE Avg P/E
35.4% 36.6%
51.7%
64.5%
30%
40%
50%
60%
70%
ASTRA PRINCPIP SI FNXP
Pre-tax ROIC - FY21
16.7
32.3 34.4
89.2
16.4
28.0
46.6
10
20
30
40
50
60
70
80
90
100
FNXP SI PRINCPIP ASTRA
1-year forward P/E 5-yr avg
7 Aug 2021 6
[Table_header2] Prince Pipes & Fittings Ltd (PRINCPIP IN) MAINTAIN NEUTRAL
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Analyst Certification:
I, Utkarsh Nopany, certify that (i) the views expressed in this research report accurately reflect my personal views about any or all of the subject companies or issuers referred to in this research and (ii) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report; and that I (including members of my household) have no financial interest in the security or securities of the subject companies discussed. I, Sohil Kaura, certify that (i) the views expressed in this research report accurately reflect my personal views about any or all of the subject companies or issuers referred to in this research and (ii) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report; and that I (including members of my household) have no financial interest in the security or securities of the subject companies discussed.
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